A test of the rational expectations hypothesis using data from a natural experiment |
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| Authors: | Anna Conte Peter G. Moffatt Fabrizio Botti Daniela T. Di Cagno Carlo D’Ippoliti |
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| Affiliation: | 1. Strategic Interaction Group, Max-Planck Institute of Economics , Jena, Germany;2. Department of Economics and Quantitative Methods , University of Westminster , London, UK aconte@econ.mpg.de A.Conte@westminster.ac.uk;4. School of Economics , University of East Anglia , Norwich, UK;5. Department of Economics, Finance and Statistics , University of Perugia , Perugia, Italy;6. Department of Economic and Business Sciences , LUISS Guido Carli , Rome, Italy;7. Department of Social, Economic, Actuarial and Demographic Studies , University of Rome ‘La Sapienza’ , Rome, Italy |
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| Abstract: | ![]()
Data on contestants’ choices in Italian Game Show Affari Tuoi are analysed in a way that separates the effect of risk attitude (preferences) from that of beliefs concerning the amount of money that will be offered to contestants in future rounds. This separate identification is possible by virtue of the fact that, at a certain stage of the game, beliefs are not relevant, and risk attitude is the sole determinant of choice. The rational expectations hypothesis is tested by comparing the estimated belief function with the ‘true’ offer function which is estimated extraneously using data on offers actually made to contestants. We find a close correspondence, leading us to accept the rational expectations hypothesis. The importance of belief formation is confirmed by the estimation of a mixture model which establishes that the vast majority of contestants are forward looking as opposed to myopic. |
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| Keywords: | beliefs discrete choice models extraneous estimators natural experiments rational expectations risky choice |
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